The Ultimate Economics Journal
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WORD OF THE WEEK
Arbitrage
/ˈärbəˌträZH/ Noun
This is an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of a price difference and generate profit.
This is a scenario in which one entity, business or country, can manufacture a product more efficiently- at a higher quality and faster rate for a greater profit- than another competing entity can produce.
Adverse Selection
This is a market process in which buyers and sellers of a product or service are able to use their private knowledge of the risk factors involved in the transaction to maximize their outcomes, at the expense of the other parties to the transaction. It usually occurs in transactions in which one party has more or better information than the other party.
Asymmetric Information
It is a situation when one party in a transaction is in possession of more information than the other, such as the seller of a good in certain transactions could have more knowledge of the good being sold than the buyer.
Adaptive Expectations
This is an economic theory whereby people form their expectations about what will happen in the future based on what has happened in the past.
Arbitrage
It is an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of a price difference and generate profit.
B
Behavioral Economics
It is a field of economics that uses an understanding of human psychology to account for why people deviate from rational action when they are making decisions. It examines how various factors affect human decision-making, which is not always rational.
Budget
It is a financial plan based on income and expenditures. It is an estimate of how much an individual, business, or government will make and spend over a certain period of time.
Backward Induction
This is an iterative process of reasoning backward in time, from the end of a problem or situation, to solve finite extensive form and sequential games, and infer a sequence of optimal actions. The process continues backward until one has determined the best action for every possible situation at every point in time.
Break-Even Point
This is the point at which total fixed and variable costs are equal to total revenues. In this case, there is no net loss or gain.
Business Cycle
It refers to economy-wide fluctuations in production, trade, and general economic activity.
Basis Point
This is a point that represents the smallest unit of measurement for interest rates and other financial instruments.
C
Ceteris Paribus
This is a Latin phrase that means “all things being equal”. It is used in Economics to rule out the possibility of other variables changing, which may have an impact on the outcome of interest.
Consumer Surplus
This is the difference between the willingness of a consumer to pay for a commodity and the actual price they pay. It is simply the measure of a consumer's excess benefit.
Capitalism
It is an economic system in which private actors (that is, individuals or businesses) own and control factors of production and the forces of demand and supply freely set prices in markets in a way that can serve the best interests of society.
Cartel
This is an explicit form of collusion among firms or producers of a good or service to regulate supply in order to manipulate prices.
Capital Flight
This occurs when money or assets rapidly flow out of a country due to an event of economic consequence such as increases in taxes on capital, economic recessions, or unstable governments.
Consumer Price Index
It is a measure that examines the changes in the price level of the market basket of consumer goods and services purchased by households.
Crowding Out
This is a phenomenon that occurs when increased government involvement in a sector of a market economy substantially affects the remainder of the market. For example, increased interest rates could lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending.
Contestable Market Theory
The is an economic concept stating that companies with few rivals behave in a competitive manner when the market they operate in has weak barriers to entry.
D
Division of Labor
This is the separation of a work process into a number of tasks, with enables workers or a group of workers to focus on specific tasks. This increases overall efficiency and productivity.
Deflation
This is a decline in the overall level of prices of goods and services in an economy and an increase in the purchasing power of the currency.
Disposable Income
It is the money that is available to invest, save, or spend on necessities and nonessential items after deducting income taxes.
Discounted Cash Flow
This is a valuation method used to estimate the present value of future cash flows.
E
Econometrics
It is the quantitative application of statistical and mathematical models using economic data to develop theories or test existing hypotheses.
Economic Efficiency
This is a state where every resource is allocated optimally so that each person is served in the best possible way and waste is minimized.
Economic Growth
It is the improvement in the inflation-adjusted market value of the goods and services produced by an economy, compared from one period to the next.
Economies of Scale
This is the phenomenon where the average costs per unit of output decrease with the increase in the scale or magnitude of the output being produced by a firm. In simple terms, the greater the quantity of output produced, the lower the per-unit cost.
Engel's Law
This is an economic theory that states that as household income rises, the percentage of income spent on food goes down.
Externality
It is an indirect cost or benefit of an economic activity, such as production or consumption of goods, that is imposed on an uninvolved third party that is not incorporated into the final cost. It can be considered as unpriced products involved in either consumer or producer market transactions. An example is air pollution from motor vehicles.
F
Factors of production
This describes the resources and inputs required in producing goods and services. They are primarily divided into four categories: land, labor, capital, and entrepreneurship.
Fiscal Policy
This is the use of government revenue through taxes and expenditures to influence a nation’s economy.
Fixed Cost
This is also known as the indirect or overhead cost. It is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Examples include rent or mortgage payments, salaries, and property taxes.
Free Lunch
This is a situation where an individual received goods or services being provided at no cost. This means that there is no cost is incurred by the individual on the receiving end.
Free Rider Problem
This is the burden on a shared resource that is caused by its use or overuse by people who are not contributing their fair share to the costs of the shared resource or are not paying anything at all. This is an example of a market failure.
G
Game Theory
It is the study of the ways in which economic agents, called players, make decisions that are interdependent. This interdependence causes each player to consider the other player’s possible decisions, or strategies, in formulating strategy.
Gross Domestic Product (GDP)
It is a measure of economic activity. It is the total monetary or market value of all the finished goods and services produced within a country in a specific time period.
Gini Coefficient
It is also known as "the Gini index" or "the Gini ratio." It is a statistical measure of inequality that describes how equal or unequal income or wealth is distributed among the population of a country.
H
Hypothesis Testing
This is a process of assessing whether an assumption from a sample of data is true or false. It is the process of assessing the validity of an assumption by evaluating data from a sample of the population.
Human Capital
This is a concept that refers to the economic value of a worker’s experience and skills. It is the measure of skills, education, capacity, and attributes of labor that influence an individual’s productive capacity and earning potential.
Human Capital
This is the economic value of the abilities and qualities of labor that influence productivity such as knowledge, skills, experience, or health.
I
Inflation
It is the overall increase in prices or the increase in the cost of living in a country over a given period of time.
Input-Output Analysis
It is a macroeconomic analysis that provides a breakdown of each sector and industry with respect to their impacts on the economy. It is a tool often used by economist and economic policy makers to help in their decision process.
Invisible Hand
It is a concept introduced by Adam Smith. It characterizes the mechanisms through which beneficial social and economic outcomes may arise from the accumulated self-interested actions of individuals, none of whom intends to bring about such outcomes. It is stressed on the principle of laissez-faire, which means that governments should not intervene in economic affairs.
Insurance
This is a contract represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses. It is a form of risk management, primarily used to hedge against the risk of uncertainty.
Investment
It is the purchase of goods that are not consumed today but are used in the future to generate wealth. It is the result of forgoing consumption.
J
K
L
Labor Intensive
This refers to a process or an industry that involves comparatively large amounts of labor to produce its goods or services.
M
Marginal Utility
This is the added satisfaction a consumer obtains from having an additional unit of a service or product. It describes the extra benefit a consumer gains from one more quantity of products or services. It can either be positive, negative or zero.
Monetary Policy
This is a set of tools used by the monetary authority of a nation to control the overall supply of money, often as an attempt to minimize inflation, to ensure the stability of prices, and the nation’s currency.
Moral Hazard
This is a situation in which a party engages in risky behavior or fails to act in good faith because it is aware that it is protected against the risk and another party will incur the cost.
Monopoly
This is a situation where there is a single seller, a monopolist, who sells a unique product in the market. This exists if there are barriers to entry such as legal protection created through patents or copyrights, ownership of resources, or high starting cost. The monopolist has significant power over the price it charges.
Market Failure
It is the inefficient distribution of goods and services in the free market. It occurs when individuals acting in rational self-interest produce a less than optimal or economically inefficient outcome.
Money Supply
This is the total stock of money-cash, coins, and balances in bank accounts- in circulation at a particular point in time in an economy.
Monetary Policy
This is a set of tools used by the monetary authority of a nation to control either the interest rate payable for a very short-term borrowing or the overall supply of money, as an attempt to minimize inflation, and ensure the stability of prices and the nation's currency.
Monopsony
It is a market structure in which a single buyer substantially controls prices, generates demand, and controls the market.
N
National Income
The total amount of income accruing to a country from economic activities during a period of one year is known as national income.
Natural Experiment
It is an empirical or observational study in which an event or a situation allows for the random assignment of individuals into either a control or a treatment group. Here, treatments to subjects are not artificially manipulated by researchers but instead are allowed to be influenced by nature, a policy, or factors outside of the researchers' control.
Normal Good
This is a good whose demand increases as consumer income increases. For example, if an individual’s income remuneration increases, he or she might begin to purchase more shoes. Then, shoes is a normal good.
O
Open Economy
It is an economy that interacts freely with other economies around the world. It allows the unrestricted flow of people, capital, goods, and services across its borders.
Opportunity Cost
When economists use the word "cost", they do not imply money but opportunity cost. This is the cost of a forgone alternative. It is the money, time, or other resources you give up when you choose an option A instead of option B.
Oligopoly
This is a market structure in which a few firms control a majority of the market share and typically produce similar or homogeneous products.
P
Pareto Efficiency
This is an economic state where resources are allocated such that it is not possible to make an individual better off without making someone else worse off. Resources are allocated in the most economically efficient manner, however, it does not result in fairness.
Perfect Competition
It is a market structure where competition is at its greatest possible level. Also, it is characterized by a large number of buyers and sellers, perfect information, and homogeneous products produced by firms. Ideally, it is a hypothetical situation that cannot possibly exist in a market.
Perfect Information
It is a feature of perfect competition, in which all consumers and producers have outright, prompt details about cost function, utility, and market prices. Simply put, all consumers and producers know everything they need to know in order to make the right choices.
Private Goods
These are goods whose ownership is restricted to the group or individual that purchased the good for their own consumption. It is not shared with anybody else but can be sold along with transferring rights to use or consume it. They are rivalrous and excludable, as opposed to public goods. Examples are a pair of shoes, airplane tickets, cellphones, or a dinner at a restaurant.
Privatization
It is the transfer of ownership of a business, industry, or service from the government to a private sector. Examples of services that can be privatized include airport operation, vehicle maintenance, water and wastewater utilities, and waste collection and disposal.
Public Goods
This is a product or service that is non-excludable, that is one cannot exclude individuals from enjoying its benefits when provided, and nondepletable (or “non-rivalrous), which is that one individual’s enjoyment of the good does not diminish the amount of the good available to others. Some examples are clean air, national defense, and street lighting.
Public Utility
This is a public-service corporation that supplies essential goods or services to the public such as electricity, water, telephone, natural gas, or postal services.
Producer Goods
They are also known as “intermediate goods” used by producers in further manufacturing or processing to create consumer goods. Examples are capital goods, such as machinery and equipment, raw materials, and semi-finished products.
Property Rights
It is a bundle of entitlements defining an owner’s rights, privileges, and limitations to the use of a resource.
Price Ceiling
It is a government or group-imposed price control or limit on the maximum amount that can be charged for a good or service. It is also known as a “Price Cap”.
Progressive Tax
It is a tax system where the tax rate, along with tax liability increases, as an individual’s wealth increases.
Q
Quota
This is a government-imposed limit on the quantity or monetary value of the goods or services that may be exported, imported, or produced over a specified period of time.
R
Recession
This is characterized by a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real Gross Domestic Product, employment, or industrial production.
Replication
This is an attempt to validate the findings of a published research study by repeating the experiment and reproducing the results.
Risk Averse
It is the tendency of people to prefer outcomes with low uncertainty to those with high uncertainty. Individuals who are risk-averse avoid high-risk investments and prefer investments that provide a sure return.
Rational Expectations
It is an economic theory that states that individuals make decisions based on the best available information in the market and learn from past trends.
Rent-Seeking
This is an economic concept that occurs when an individual or entity seeks to increase their own wealth without creating any benefits or wealth for the society.
S
Statistical Power
It is the probability of rejecting a false null hypothesis. It is the probability that it will yield statistically significant results. For example, if a researcher found out that his or her study has a statistical power value of 0.40, the researcher had a 40 percent chance of rejecting a false null hypothesis. If the research were repeated 100 times, he or she would reject a false null hypothesis in 50 studies. The larger our sample size, the greater the statistical power.
Sticky Prices
This is a situation in which the price of a good does not change immediately or readily to the new market-clearing price when there are shifts in the demand and supply curve. Wages are a good example of price stickiness.
Structural Change
This is a sizeable shift in the way a market, industry, or country function or operate. This is usually brought about by major economic developments.
Subsidy
This is a form of financial support extended to an individual or organization with the aim of promoting economic and social policy. It could be a direct payment (such as cash) or indirect (such as tax breaks) from the government to private entities, usually to ensure firms stay in business and protect jobs.
Substitute Goods
Two goods, for example, Coca-Cola and Pepsi, are regarded as substitutes if an increase in the price of one of them increases demand for the other and vice versa.
Stock Exchange
This is a centralized marketplace where stocks, bonds, and other securities are traded, bought, and sold.
Social Safety Net
This is a set of governmental programs, entitlements, or benefits providing citizens and residents with a minimum level of financial protection, food, access to public infrastructure, or medical services. This non-contributory assistance exists to improve the lives of vulnerable families and individuals experiencing poverty and destitution.
T
Treasury Bills
Also known as T-Bills. These are bills used for managing fluctuations in the government’s short-run cash needs. These bills are issued only by the central government of a country.
Tragedy of the Commons
This is a problem that occurs when individuals exploit a shared resource, act in their own interest, and in doing so, ultimately deplete the resource. It is an economic problem of overconsumption, underinvestment, and ultimately depletion of a common pool resource.
Tariff
It is a tax imposed by one country on the goods and services imported from another country. It may either be levied as a proportion of the value of imported goods or as a fixed charge for each unit of a good that is imported.
Trough
This is the point in the business cycle between the end of a recession and the transition to accelerating Gross Domestic Product growth. It is a low turning point or a local minimum of a business cycle.
Trade Surplus
This is an economic indicator of a positive balance of trade in which a country's export exceeds its import.
U
Unit Elastic
Also known as Unitary Elastic. It describes a situation where a change in price will cause an equal proportional change in quantity demanded or supplied. This means that the supply or demand curve is perfectly responsive to changes in price.
V
Value Added Tax (VAT)
It is a type of tax that is assessed incrementally. It is levied at every stage of a product's production from the sale of the raw materials to its final purchase by a consumer.
Variable Cost
It is a cost that changes as the quantity of the good or service that a business produces changes.
W
Windfall Gains
This is also known as a windfall profit. It is a large, sudden, or unexpected gain resulting from lucky or unforeseen circumstances such as an inheritance or winning a lottery.
